ECLAC report considers the use of blockchain technology to combat de-risking

Recent developments in the field of financial technology (FinTech) may offer potential solutions to some of the problems surrounding de-risking and the navigation of correspondent banking relationships.

A newly published report prepared by The Economic Commission for Latin America and the Caribbean (ECLAC) subregional headquarters for the Caribbean has found that recent developments in the field of financial technology (FinTech), namely blockchain technology, may offer potential solutions to some of the problems surrounding de-risking and the navigation of correspondent banking relationships.

De-risking is the term used to describe the practice whereby banking institutions turn away from working relationships and lines of business for which the cost of regulatory compliance — and the risk of non-compliance— is deemed to be too high in comparison to the returns. This phenomenon is affecting developing economies around the world, but taking the hardest hits have been the small and vulnerable economies including countries of the Caribbean.

The prospective use of blockchain technology to address these challenges is outlined in ECLAC’s latest report, which states that this technology may offer an alternative means for financial service institutions to support cross-border transactions. A blockchain is an implementation of cryptographic technology that enables data to be shared across a network of computers controlled by multiple organizations and individuals.

According to the report, “this technology appears to have the potential to address the problem of de-risking on two fronts. Firstly, an appropriately designed blockchain-based settlement network would offer tools to improve surveillance of transactions, which would enable the detection of illicit financial transfers and thereby decrease risk and associated compliance costs. Secondly, a blockchain-based network would offer Caribbean banks the opportunity to bypass correspondent banks altogether, thereby reducing transaction costs and increasing efficiency.”

The report concludes that there are still a number of issues which must be contended with before blockchain technology is ready to take a major role in providing relief to the correspondent banking problem. This includes the need to address concerns over consumer protection, privacy, and compliance with international financial guidelines.